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| TMK > SEC Filings for TMK > Form 10-Q on 7-Aug-2009 | All Recent SEC Filings |
7-Aug-2009
Quarterly Report
Summary of Operations. Torchmark's operations are segmented into its insurance underwriting and investment operations as described in Note G-Business Segments. The measures of profitability described in Note G are useful in evaluating the performance of the segments and the marketing groups within each insurance segment, because each of our distribution units operates in a niche market. These measures enable management to view period-to-period trends, and to make informed decisions regarding future courses of action.
The tables in Note G-Business Segments demonstrate how the measures of profitability are determined. Those tables also reconcile our revenues and expenses by segment to major income statement line items for the six-month periods ended June 30, 2009 and 2008. Additionally, a table in that note, Analysis of Profitability by Segment, provides a summary of the profitability measures that demonstrates year-to-year comparability and which reconciles those measures to our net income. That summary represents our overall operations in the manner that management views the business, and is a basis of the following highlights discussion.
A discussion of operations by each segment follows later in this report. These discussions compare the first six months of 2009 with the same period of 2008, unless otherwise noted.
Highlights, comparing the first six months of 2009 with the first six months of 2008. Net income per diluted share declined 17% to $2.29. Net income for the 2009 period reflects an after-tax charge of $.63 per share for realized investment losses of which $.70 was attributable to writedowns of securities determined to be other-than-temporarily impaired. These writedowns are discussed in detail in Note E-Investments under the caption Other-Than-Temporary Impairments in this report. Net income per share during the 2008 period reflected an after tax loss of $.10 per share for realized investment losses of which $.09 was a result of other-than-temporary impairments of fixed maturities and real estate. Additionally, as explained in Note G-Business Segments, differences in our estimate of interim results for Medicare Part D as we view this product for segment purposes and GAAP resulted in an $11 million after-tax charge to 2009 earnings or $.13 per share, compared with a charge of $11 million after-tax or $.12 per share in the prior period. We expect our 2009 full year benefit ratios to be approximately the same as those for interim periods, as was the case in 2008 and prior years. For this reason, there should be no differences in segment versus GAAP reporting by year end 2009, as it relates to Medicare Part D.
We use three statistical measures as indicators of product sales: "annualized premium in force," "net sales," and "first-year collected premium." Annualized premium in force is defined as the premium income that would be received over the following twelve months at any given date on all active policies if those policies remain in force throughout
the twelve-month period. Annualized premium in force is an indicator of potential growth in premium revenue. Net sales is defined as annualized premium issued, net of cancellations in the first thirty days after issue, except for Direct Response, where net sales is annualized premium issued at the time the first full premium is paid after any introductory offer has expired. Annualized premium issued is the gross premium that would be received during the policies' first year in force, assuming that none of the policies lapsed or terminated. Although lapses and terminations will occur, we believe that net sales is a useful indicator of the rate of acceleration of premium growth. First-year collected premium is the premium collected during the reporting period for all policies in their first policy year. First-year collected premium takes lapses into account in the first policy year when lapses are more likely to occur, and thus is a useful indicator of how much new premium is expected to be added to premium income in the future.
Total premium income declined 3% for the 2009 six months to $1.4 billion, as health premium declined 10%. Total net sales declined 8% to $217 million. First-year collected premium declined 13% to $165 million for the period.
Life insurance premium income grew 2% to $828 million. Life net sales increased in each of Torchmark's major distribution groups, increasing 12% in total to $164 million. First-year collected life premium rose 7% to $111 million. Life underwriting margins increased 4% to $221 million.
Health insurance premium income, excluding Medicare Part D premium, decreased 12% to $436 million. Health net sales, excluding Part D, declined 50% to $40 million and first-year collected health premium, excluding Part D, declined 47% to $42 million. These declines resulted primarily from the increased turnover of agents in our United American (UA) Branch Office Agency. This Agency has historically been a key distributor of our health products, but has been facing increased competition in recent periods. We are addressing the turnover in the UA Branch Office Agency by combining this Agency with the Liberty National Exclusive Agency, offering the agents new lines of products to sell with new compensation incentives focused on marketing those products. Beginning in 2009, we have combined the financial results for Liberty National and the UA Branch Office systems to reflect their ongoing consolidation. We will continue to report net sales and producing agents separately for the balance of 2009. Health underwriting income of $79 million, excluding Part D, remained at 18% of premium in 2009.
Our Medicare Part D prescription drug business is a component of the health insurance segment. In the manner we view our Medicare Part D business as described in Note G-Business Segments, policyholder premium was $91 million in both 2009 and 2008. Underwriting income declined slightly to $10 million.
Excess investment income per diluted share increased 3% to $1.88, while excess investment income declined 7% to $156 million. Net investment income increased $2 million or less than 1%, even though the portfolio at amortized cost grew 3%. We held significantly more short-term investments in the 2009 period due to the uncertain economic environment, even though yields on short-terms were .1% in 2009 compared with 2.5% a
year earlier. The decline in excess investment income was due to the greater holding of short-terms which negatively affected net investment income and from the $13 million or 10% increase in interest cost on net insurance policy liabilities. Financing costs declined 1% in the period primarily as a result of lower short-term rates on our commercial paper facility.
In the first six months of 2009, we invested new money at an effective annual yield on new investments of 7.34%. This yield compares with an average portfolio yield of 6.97% (as of June 30, 2009). The fixed-maturity portfolio at fair value accounted for 88% of total investments at June 30, 2009 and had an average rating of BBB. Short-term investments accounted for 7%, up from 2% at year end 2008.
During the first six months of 2009, the net unrealized losses in our fixed maturity portfolio improved from $1.8 billion at year end 2008 to $1.4 billion at June 30, 2009. The fixed maturity portfolio contains no securities backed by subprime or Alt A mortgages. We are not a party to any counterparty risk, with no credit default swaps or other derivative contracts. We do not engage in securities lending.
As described in Note H-Debt Offering, we issued $300 million principal amount of 9 1/4% Senior Notes as of June 30, 2009 for proceeds of $296 million after expenses. We intend to use these funds to repay our $99 million of 8 1/4% Senior Debentures due August 15, 2009 and for other corporate purposes.
We have an on-going share repurchase program which began in 1986 and was reaffirmed at the October 30, 2008 Board of Directors' meeting. With no specified authorization amount, we determine the amount of repurchases based on the amount of our excess cash flow, general market conditions, and other alternative uses. In view of the current economic conditions, we temporarily suspended our share repurchase program in the first quarter of 2009. We may resume the program when market conditions are favorable but do not anticipate acquisitions for the remainder of 2009. In the first six months of 2009, we acquired 2.07 million shares of the Company's common stock in the open market at a cost of $48 million ($22.98 average price per share). Of the $48 million, $47 million was from excess operating cash flow, which was used to repurchase 2.05 million shares, and $869 thousand was from the cash received from stock option exercises by current and former employees. Proceeds from these option exercises were used to repurchase 20 thousand shares in order to offset dilution from the exercises.
A detailed discussion of our operations by component segment follows.
Life insurance, comparing the first six months of 2009 with the first six months of 2008. Life insurance is our predominant segment, representing 61% of premium income and 71% of insurance underwriting margin in the first six months of 2009. In addition, investments supporting the reserves for life business generate the majority of excess investment income attributable to the Investment segment. Life insurance premium income increased 2% to $828 million. We are currently in the process of combining our United American (UA) Branch Office Exclusive Agency with the Liberty National Exclusive
Agency. Management expects that our subsidiaries, UA and Liberty National, will be merged by the end of 2009. For this reason, all premium income and margin data will be reported on a combined basis in this report. However, we will continue to report sales data and agent counts separately for the two agencies until the two companies are merged. The following table presents Torchmark's life insurance premium by distribution method.
Life Insurance
Premium by Distribution Method
(Dollar amounts in thousands)
Six months ended June 30, Increase
2009 2008 (Decrease)
% of % of
Amount Total Amount Total Amount %
Direct Response $ 270,603 33 $ 257,887 32 $ 12,716 5
American Income Exclusive Agency 247,899 30 234,266 29 13,633 6
Liberty National Exclusive Agency 150,053 18 152,627 19 (2,574 ) (2 )
Other Agencies 159,237 19 164,660 20 (5,423 ) (3 )
Total Life Premium $ 827,792 100 $ 809,440 100 $ 18,352 2
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Net sales, defined earlier in this report as an indicator of new business production, grew 12% to $164 million. Each of our three primary distribution groups had double-digit growth in net sales. An analysis of life net sales by distribution group is presented below.
Life Insurance
Net Sales by Distribution Method
(Dollar amounts in thousands)
Six months ended June 30, Increase
2009 2008 (Decrease)
% of % of
Amount Total Amount Total Amount %
Direct Response $ 68,589 42 $ 62,218 42 $ 6,371 10
American Income Exclusive Agency 60,521 37 52,002 36 8,519 16
Liberty National Exclusive Agency 24,639 15 22,167 15 2,472 11
United American Branch Office Agency 4,232 2 3,675 3 557 15
Other Agencies 5,991 4 6,447 4 (456 ) (7 )
Total Life Net Sales $ 163,972 100 $ 146,509 100 $ 17,463 12
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First-year collected life premium, defined earlier in this report, was $111 million in the 2009 period, rising 7% over the prior-year period. First-year collected life premium by distribution group is presented in the table below.
Life Insurance
First-Year Collected Premium by Distribution Method
(Dollar amounts in thousands)
Six months ended June 30, Increase
2009 2008 (Decrease)
% of % of
Amount Total Amount Total Amount %
Direct Response $ 42,738 38 $ 40,980 39 $ 1,758 4
American Income Exclusive Agency 45,288 41 39,745 38 5,543 14
Liberty National Exclusive Agency 17,614 16 16,167 16 1,447 9
Other Agencies 5,262 5 6,876 7 (1,614 ) (23 )
Total $ 110,902 100 $ 103,768 100 $ 7,134 7
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The Direct Response operation consists of two primary components: insert media and direct mail. Insert media, which targets primarily the adult market, involves placing insurance solicitations as advertising inserts into a variety of media, such as coupon packets, newspapers, bank statements, and billings. Direct mail targets primarily young middle-income households with children. The juvenile life insurance policy is a key product. Not only is the juvenile market an important source of sales, but it also is a vehicle to reach the parents and grandparents of the juvenile policyholders. Parents and grandparents of these juvenile policyholders are more likely to respond favorably to a Direct Response solicitation for life coverage on themselves than is the general adult population. Also, both the juvenile policyholders and their parents are low acquisition-cost targets for sales of additional coverage over time.
Direct Response's life premium income rose 5% to $271 million, representing 33% of Torchmark's total life premium, the largest contribution to premium of any distribution system. Net sales of $69 million rose 10% and first-year collected premium of $43 million rose 4% over the prior year period.
The American Income Exclusive Agency markets primarily to members of labor unions, but also to credit unions and other associations. This agency produced premium income of $248 million, an increase of 6%. American Income is Torchmark's fastest growing life insurance agency on the basis of net sales and premium collection. Net sales increased 16% to $61 million, while first-year collected premium rose 14% to $45 million. Growth in sales in our captive agencies is highly dependent on growing the size of the agency force. The American Income agent count was 3,822 at June 30, 2009, 36% higher than a year earlier (2,805). The American Income agency continues to emphasize the recruiting and retention of new agents, focusing on an incentive program to reward growth in both recruiting and production.
As previously mentioned, we are merging the UA Branch Office Agency into the Liberty National Exclusive Agency. The Liberty National Agency has historically marketed life insurance to middle-income customers primarily in the Southeast. The UA Branch Office Agency has historically emphasized health products, but is now changing its
focus for newly recruited agents to market Liberty's life and health products. Life premium income for this combined agency was $150 million for the 2009 period, a 2% decline compared with $153 million in the 2008 period. First-year collected premium on a combined basis rose 9% to $18 million.
Liberty National's net sales increased 11% to $25 million. The increase in net sales, a lead indicator, is indicative of the recent growth in the size of this agency. The Liberty Agency had 3,259 producing agents at June 30, 2009, compared with 3,101 a year earlier, an increase of 5%. However the agent count declined 3% since year end 2008. Efforts have been underway to build the size of this agency over the past three years and to strengthen the retention of agents and improve the persistency of business in 2009. Factors in this program are ongoing revisions to the agents' compensation system to increase incentives, to retain agents longer term, and to improve persistency. Management believes that the production incentives and rewards of this compensation system will allow this agency to attract and retain more successful agents and that these changes will result in a more productive agency over the long term.
The UA Branch Office Agency produced net sales of $4.2 million in 2009 of Liberty National's life products. As noted above, this Agency traditionally focused on health product sales. Due to intense competition in recent periods in the health insurance market, the UA Branch has experienced sharp declines in agent count. The UA Branch Office Agency had 1,165 producing agents at June 30, 2009, compared with 2,306 agents a year earlier.
As is the case with all of our captive agency forces, growing the number of productive agents is critical to the growth in sales. Going forward, we are shifting the emphasis in the UA Branch to life and health products currently marketed by Liberty National agents. These products are priced to achieve higher profit margins and have better persistency than the UA Branch's limited-benefit health insurance. This Agency will continue to offer the current product portfolio, but the majority of our financial incentives will be used to encourage new agents to sell the Liberty National product line. We believe that the combination of this Agency with the Liberty National Agency will provide financial incentives to agents and will improve the stability and profitability of the UA Branch Office Agency.
The Other Agencies distribution systems offering life insurance include the Military Agency, the UA Independent Agency (which predominantly writes health insurance), United Investors, and various minor distribution channels. The Other Agencies distribution group contributed $159 million of life premium income, or 19% of Torchmark's total in the 2009 period, but contributed only 4% of net sales.
Life Insurance
Summary of Results
(Dollar amounts in thousands)
Six months ended June 30,
2009 2008 Increase
% of % of
Amount Premium Amount Premium Amount %
Premium and policy charges $ 827,792 100 $ 809,440 100 $ 18,352 2
Net policy obligations 332,953 40 338,900 42 (5,947 ) (2 )
Commissions and acquisition expense 273,745 33 258,825 32 14,920 6
Insurance underwriting income before
other income and administrative expense $ 221,094 27 $ 211,715 26 $ 9,379 4
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Life insurance underwriting income before insurance administrative expense was $221 million, increasing 4%. This margin growth was caused by the combination of premium growth, a reduction in Direct Response's obligation ratios, and improvement in American Income's margin in 2009. As a percentage of life premium, underwriting margin rose from 26% to 27%.
Health insurance, comparing the first six months of 2009 with the first six months of 2008.Health premium accounted for 39% of our total premium in the 2009 period, while the health underwriting margin accounted for 29% of total underwriting margin, reflective of the lower underwriting margin as a percent of premium for health compared with life insurance. Our health products include a variety of limited-benefit health plans including hospital/surgical, cancer and accident plans sold to customers under age 65, as well as Medicare Supplements sold to Medicare enrollees. We also provide coverage under the Medicare Part D prescription drug plan. Medicare Part D business is shown as a separate health component and will be discussed separately in the analysis of the health segment.
As explained in Note G-Business Segments, management does not view the government risk-sharing premium for Medicare Part D as a component of premium income. Excluding this risk-sharing premium, health insurance premium for the 2009 period was $527 million, declining 10%. A reconciliation between segment reporting for Medicare Part D and GAAP is presented in the chart in Note G-Business Segments, and those differences are fully discussed in that note.
The table below is an analysis of our health premium by distribution method.
Six months ended June 30, Increase
2009 2008 (Decrease)
% of % of
Amount Total Amount Total Amount %
United American Independent Agency
Limited-benefit plans $ 33,121 $ 42,454 $ (9,333 ) (22 )
Medicare Supplement 137,308 143,142 (5,834 ) (4 )
170,429 39 185,596 37 (15,167 ) (8 )
Liberty National Exclusive Agency
Limited-benefit plans 129,945 165,168 (35,223 ) (21 )
Medicare Supplement 75,564 85,480 (9,916 ) (12 )
205,509 47 250,648 51 (45,139 ) (18 )
American Income Exclusive Agency
Limited-benefit plans 36,075 35,731 344 1
Medicare Supplement 568 661 (93 ) (14 )
36,643 9 36,392 7 251 1
Direct Response
Limited-benefit plans 232 253 (21 ) (8 )
Medicare Supplement 23,105 22,606 499 2
23,337 5 22,859 5 478 2
Total Health Premium (Before Part D)
Limited-benefit plans 199,373 46 243,606 49 (44,233 ) (18 )
Medicare Supplement 236,545 54 251,889 51 (15,344 ) (6 )
Total (Before Part D) 435,918 100 495,495 100 (59,577 ) (12 )
Medicare Part D* 91,344 91,140 204 0
Total Health Premium* $ 527,262 $ 586,635 $ (59,373 ) (10 )
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* Health premium per the segment analysis will not agree with health premium on the Consolidated Statement of Operations because of the Part D government risk-sharing premium adjustment explained in Note G-Business Segments.
Presented below is a table of health net sales by distribution method.
Six months ended June 30, Increase
2009 2008 (Decrease)
% of % of
Amount Total Amount Total Amount %
United American Independent Agency
Limited-benefit plans $ 7,262 $ 13,527 $ (6,265 ) (46 )
Medicare Supplement 6,188 6,065 123 2
13,450 33 19,592 25 (6,142 ) (31 )
United American Branch Office Agency
Limited-benefit plans 9,270 41,756 (32,486 ) (78 )
Medicare Supplement 2,627 4,125 (1,498 ) (36 )
11,897 30 45,881 58 (33,984 ) (74 )
Liberty National Exclusive Agency
Limited-benefit plans 6,310 5,170 1,140 22
Medicare Supplement 46 62 (16 ) (26 )
6,356 16 5,232 7 1,124 21
American Income Exclusive Agency
Limited-benefit plans 6,373 5,894 479 8
Medicare Supplement 0 0 0 0
6,373 16 5,894 7 479 8
Direct Response
Limited-benefit plans 549 303 246 81
Medicare Supplement 1,460 2,498 (1,038 ) (42 )
2,009 5 2,801 3 (792 ) (28 )
Total Net Sales (Before Part D)
Limited-benefit plans 29,764 74 66,650 84 (36,886 ) (55 )
Medicare Supplement 10,321 26 12,750 16 (2,429 ) (19 )
. . .
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